Navigate Singapore 2019 ~ Transport Sector - NEUTRAL

Positive Trends

Airlines and airport services

Due to robust yield management strategies, SINGAPORE AIRLINES LTD (SGX:C6L) mainline carrier and Scoot have seen four consecutive quarters of y-o-y increases in revenue per unit of ASK capacity (RASK), as higher load factors have more than offset yield declines. SIA’s cargo operations also continue to see strong demand and yields.

The SIA group is also pursuing structural initiatives, like de-emphasising growth of SilkAir in favour of lower-cost Scoot. SIA has relaunched its direct, long-haul flights to the US, which will help boost its short-haul connections and enhance its network connectivity.

Capacity expansion by the Middle East and Chinese airlines has generally slowed in recent quarters, and as these carriers do not hedge fuel, we expect them to be more rational in their pricing and capacity expansion going forward. Conversely, SIA’s robust 46% fuel hedge cover until CY22F will protect the group substantially, against less-fortunate, lightly-hedged peers.

Land transport

Due to the optimisation and renewal of its taxi fleet in Singapore, COMFORTDELGRO CORPORATION LTD (SGX:C52) has seen three consecutive quarters of q-o-q increases in operating profit from the taxi business amid expansion of its fleet over the Jul-Sep period. Taxi idle rate remains at 2% and its fleet stood at 12,691 as at end-Sep; ComfortDelGro is expecting to take delivery of up to 700 new hybrid taxis by year-end. Total taxis in Singapore saw a net increase of 115 over the Jul-Sep period, in contrast to a net decline of 2,407 private hire cars in the same period.

For its public transport services, ComfortDelGro continued to see y-o-y increases in operating profit over the past six consecutive quarters amid higher ridership across all of its rail services – North East Line (NEL), Sengkang-Punggol LRT (SPLRT) and Downtown Line (DTL) – with the newer DTL’s average daily ridership registering an 82.9% y-o-y increase to 472k passenger trips during the Jul-Sep 18 quarter. The Public Transport Council has also approved a 4.3% hike in rail fares that will take effect by year-end after three consecutive years of fare declines, which should translate into an increase of S$10.9m in train revenue for ComfortDelGro.

Negative Trends

Airlines and airport services

Changi Airport raised the passenger service charge (PSC) by S$13.30 effective 1 Jul 2018, representing a 2.5% hike in SIA mainline’s average fares, a 5.6% hike for SilkAir, and a 7% hike for Scoot. Long-haul flights should be immune to this, but demand for short-haul and LCC flights could be impacted, and make it more difficult for the SIA group to pass on higher jet fuel prices. We expect oil prices to rise over the next two years due to the effects of the International Maritime Organization’s global sulphur cap on marine fuels that will take effect from 1 Jan 2020; this has the potential to hurt SIA’s bottomline.

IATA recently highlighted that growth in global air passenger demand and airfreight demand has been slowing down, commensurate with the slowdown in global Purchasing Managers Index (PMI). Also, we expect the potential losses from SIA’s launch of direct ultra long-haul (ULR) flights to the US to be visible from 4QCY18F onwards, although they remain strategically critical to SIA.

SATS has started to feel the pressure from trade tension as cargo volumes for emerging markets and in/out of China slowed down. Weakening currency from India and Indonesia also eroded some of its associates’ profits.

Looking To 2019

Our airlines analyst, Raymond Yap, is taking a more bullish view on jet fuel prices, which we assume to average US$85/bbl in CY18F, rise to US$90/bbl in CY19F, and to US$95/bbl in CY20F, driven up by US sanctions on Iranian oil exports and by the upcoming IMO 2020 implementation. This is expected to be partially offset by assumed increases in base ticket prices, but this may not fully recover the higher fuel costs. However, the outlook for SIAmay be made more challenging in CY20F due to the softening global growth outlook, as indicated by the sequentially declining global Purchasing Managers’ Index (PMI) and the new export orders of the global PMI.

For ComfortDelGro, we see robust earnings growth in FY19F (+13% y-o-y), underpinned by stronger earnings from both the taxi and public transport services segments. Notwithstanding Go-JEK entering the private-hire car (PHC) fray but under a more regulated ride-hailing space and given that Uber has exited Southeast Asia after sparking an unsustainable price war, we believe the worst is over for ComfortDelGro’s taxi business. Public transport services should continue to grow, supported by a 4.3% hike in rail fares and overseas acquisitions.

Declining growth in trade could also post softness in freights handled by SATS. In the longer term, alternative trade routes into/out of ASEAN (such as Vietnam) could mitigate this, but we do not expect this to take place in the next 12 months.

Stock Preference

Our target price for SIA is at S$10.10, based on 0.9x CY19F P/BV, which is at -1 s.d. of its P/BV mean since 2001, as we do not think that investors will be motivated to bid up the share price given the prevailing tough conditions. We do believe, however, that SIA is intrinsically worth at least 1x P/BV over the long term, as the airline group continues to be profitable despite very tough competitive conditions, and continues to invest in its products, services and network that keeps it at, or near, the top of its peers in every way imaginable.

ComfortDelGro is our preferred pick in the transport sector with an ADD call on the stock. Our target price of S$2.74 is based on DCF valuation (WACC: 7.4%; LTG: 2%) which implies 18x CY19F P/E. At 14x 12M forward P/E, below its 10-year historical average of 16x, its valuation appears undemanding, in our view.

We have a HOLD call on SATS with a Target Price of S$5.06, based on 20x CY19F P/E (3-year mean). Re-rating catalysts could come from sizeable earnings-accretive M&As. At c.19x CY19F, the stock appears fairly traded with potential risks from further devaluation of emerging market currency and weaker-than-expected cargo handling volume as a result of trade tension.

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